Where Does Paul Ryan Go When He Thinks About Monetary Policy?

If you don’t already know the answer to that question, you haven’t been paying attention since Mitt Romney chose Ryan to be his running mate on the GOP ticket. But I have. Well, not really, but I did stumble across a piece by David Wiegel today in Slate. My jaw is still out of position after that experience.

Just by way of background, since Congressman Ryan became a major figure a couple of years ago, it became common knowledge that he was something of a devote of Ayn Rand, the well-known lunatic, psychopathic, and megalomaniacal author of really bad books like The Fountainhead and Atlas Shrugged read by millions of adolescents and juveniles of all ages around the world, and the author of a not very well-known, unfinished and unpublished novel, The Little Street inspired by someone possibly even more monstrous than she, the murderer William Edward Hickman. While Rand has a cult following among certain strains of extreme right-wing zealotry, conservative Christians tend to take offense at Rand’s hysterical anti-religious bigotry. Right-wing criticism of Rand’s militant atheism combined with liberal Catholic criticism of Ryan’s budget proposals as based on the principles and teachings of Ayn Rand forced Congressman Ryan to disavow Rand in an interview with National Review. Beyond disassociating himself from Rand, Ryan called the widely circulated story that that he required members of his staff to read The Fountainhead and Atlas Shrugged as an “urban legend.” Unfortunately for Mr. Ryan, there is a recording of a 2005 speech that he gave to the Atlas Society in which he himself stated:

I grew up reading Ayn Rand and it taught me quite a bit about who I am and what my value systems are, and what my beliefs are. It’s inspired me so much that it’s required reading in my office for all my interns and my staff. We start with Atlas Shrugged. People tell me I need to start with The Fountainhead then go to Atlas Shrugged [laughter]. There’s a big debate about that. We go to Fountainhead, but then we move on, and we require Mises and Hayek as well.

Congressman Ryan apparently does not know that although Rand admired Mises, she loathed and detested Hayek as a compromiser.

David Wiegel delved into Ryan’s speech to the Atlas Society and found this mind-boggling passage (which I quote in slightly more detail than Wiegel).

It’s so important that we go back to our roots to look at Ayn Rand‘s vision, her writings, to see what our girding, under-grounding [sic] principles are. I always go back to, you know, Francisco d’Anconia’s speech (at Bill Taggart’s wedding) on money when I think about monetary policy. And then I go to the 64-page John Galt speech, you know, on the radio at the end, and go back to a lot of other things that she did, to try and make sure that I can check my premises so that I know that what I’m believing and doing and advancing are square with the key principles of individualism…

I now quote from Wiegel’s piece:

The Galt speech is fairly famous, but the d’Anconia speech is more obscure. So: In the novel, Francisco Domingo Carlos Andres Sebastian d’Anconia is the heir to a copper mining fortune who slowly dismantles it by purposefully giving in to the demands of “looters.” He admits this to Dagny Taggart, the heroine (and his former love), fairly early on. He spent $8 million, for example, on a “housing settlement” that the Mexican government demanded he build at one of the mines. It’ll all fall apart soon, he admits, except for the miners’ new church — “they’ll need it,” he says contemptuously. “Whether I did it on purpose, or through neglect, or through stupidity, don’t you understand that that doesn’t make any difference? The same element was missing.”

In early chapters, d’Anconia pretends to be a Bruce Wayne-esque reckless playboy. He occasionally slips, because he’s a Rand character. Thus, “Bill Taggart’s wedding speech,” when d’Anconia goes to the party of a businessman using state connections to make money. A left-wing magazine writer tells him that “money is the root of all evil.” That sets off d’Anconia, who launches rant about money that runs to 23 paragraphs. “When you accept money in payment for your effort,” he says, “you do so only on the conviction that you will exchange it for the product of the effort of others. It is not the moochers or the looters who give value to money. Not an ocean of tears nor all the guns in the world can transform those pieces of paper in your wallet into the bread you will need to survive tomorrow. Those pieces of paper, which should have been gold, are a token of honor – your claim upon the energy of the men who produce.”

The problem, says d’Anconia, is that statists — looters and moochers — see dollar signs and think they can, must redistribute them. “Whenever destroyers appear among men,” he says, “they start by destroying money, for money is men’s protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it becomes, marked: ‘Account overdrawn.'”

So there you have it; this is where Paul Ryan goes to think about monetary policy. Let’s read it again:  “Destroyers seize gold and leave to its owners a counterfeit pile of paper. . . . Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs.” OMG!

Jack Kemp, for whom Paul Ryan worked when he started his career, had what, at the time, seemed like a merely eccentric obsession with gold, expending a great deal of his considerable political energy and capital in futile attempts over at least two decades to stir up interest in restoring the gold standard. Apparently he was also an admirer of Ayn Rand. Thanks to David Weigel, we now know that the inspiration for a fetishistic obsession with gold may just be Francisco d’Anconia’s speech at Bill Taggart’s wedding in Atlas Shrugged.  Paul Ryan has been somewhat more circumspect than his mentor, Jack Kemp, in prostelytizing on behalf of the gold standard.  But now we know where his head is.  And we know the source — the fountainhead — for his “thinking” on monetary policy.  He said so himself.  Thank you, Congressman Ryan, for sharing.

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66 Responses to “Where Does Paul Ryan Go When He Thinks About Monetary Policy?”


  1. 1 Julian Janssen August 14, 2012 at 10:51 pm

    David,

    I didn’t really expect you to discuss Paul Ryan, but I guess I should have known better once it became apparent that he is a monetary loon who gets his economic analyses from works of fiction (by Ayn Rand), rather than economists, like Hawtrey, Cassel, Keynes, Friedman, etc.

    At first, I was just surprised that he was Romney’s choice as a running mate and tried to express why I thought he was the VP candidate: basically, it came down to the idea that he is falsely perceived as a serious-minded policy wonk.

    http://socialmacro.blogspot.com/2012/08/something-i-didnt-expect.html

    Then, I thought I should point out some of the uncomfortable truth: basically that he is stooge who likes putting gimmicks in his budgets/plans that have what some have called “magic asterisks” and that he called for raising the interest rate in the middle of this Lesser Depression:

    http://socialmacro.blogspot.com/2012/08/paul-ryans-false-virtue.html

    Today, I talked about his philosphical undergirding from Ayn Rand and how I feel that his views on the ethical case for “reforming” social security and medicare are wrong (opinion only). I point out that Social Security isn’t that hard to “fix” and that his “solutions” for Medicare amount to little more than cost-shifting, without addressing the cost of medical care or even putting a major effort into studying and modifying the entitlements accordingly.

    http://socialmacro.blogspot.com/2012/08/paul-ryans-social-security-and-medicare.html

    The idea of having Paul Ryan a “hearbeat away from the presidency” is a little scary, to me. Clearly he’s preferable to Ron Paul, but he seems to suffer from some of the same delusions, including the “hard money” fixation.

    I did so much reading on Paul Ryan the last few days… A good place to start for anyone who wants to know more would probably be Brad Delong, Ezra Klein or Mark Thoma’s blog because each link to many things, but if you want more “like-minded” commentary on Paul Ryan, you can always try the National Review, which has several articles.

    I even read that 23 paragraph speech by D’Anconia in Atlas Shrugged… it was interminable. I really don’t like Ayn Rand.

    One extra little thought… Ryan has a lot of criticism for Social Security, but it occurs to me that another Objectivist (or former?), Alan Greenspan, actually worked to preserve Social Security more or less “as is” by raising the payroll tax. According to Ryan’s 2005 speech, wouldn’t that make Greenspan a collectivist?

  2. 2 Mark Stamatakos August 15, 2012 at 12:44 am

    I don’t claim to know much about Ayn Rand, or have much of a personal opinion about Ryan. I do know we should be having a serious debate about Ryan’s ideas (for better or worse). I’ll deal here with some facts (or near facts) that should be on the table when discussing Ryan, since in all likelihood we will be seeing his mug for the next 20 or 30 years regardless of this election.

    Ryan rubber stamped most of the Bush legacy in his earliest years as a House Rep. (assented to all the appropriations for the war in Iraq and Afghan). So when I hear him anointed as the poster child for fiscal conservatism, that must have happened once Obama got in office. I would highly doubt you’d find he voted against any of Bushes’ budget plans.
    That distinction is important to me (as opposed to Ron Paul, who has virtually never wavered from his fiscal stances and has rejected our trillion dollar a year Middle East Empire building).

    Ryan’s ultimate view that the very wealthiest in our country should be paying lower taxes to spur economic growth should be what we are debating…not speculation into what drives Ryan’s decision making process or his choices of reading. Has trickle down been debunked, or is the current climate of massive government dependence the real evil by ever larger chunks of our populace. Maybe both ways are misguided.

    We should also be debating whether or not Ryan’s plan, which essentially will include a tax policy that broadens the tax base to affect all Americans, is fair for the poorest. Those in abject poverty will see a miniscule tax burden, but those in the 10,000 to 25,000 range will see a significant increase. Is this fair and would it accomplish the goal (I think) of compelling people to work towards social mobility. Or does this make it even harder to rise out of disparate circumstances.

    The middle class will probably see an increase in taxes too. Is this Ryan playing games with his core values, or a tough decision that has to be made to balance the budget.

    Do Ryan’s medicare “caps” make sense economically. How do these caps affect those who are very, very sick and require major, costly care. Are Democrats offering a different solution to the Medicare timebomb and what is it. Are we in agreement something has to change now, 10 years from now, or will we continue to do nothing. And what do we think of his Medi-caid cuts of up to 33%. This is where the serious, non-partisan discussions need to be had.

    Ryan’s budget is being hailed here as a “radical” paradigm shift, but do people realize, once again, that the budget deficit will still continue to rise under his plan (in the early stages). So we are relying on projections to assume this budget plan gets us back in the red? Projections are about as useful from our government as wooden nickels. I put as much faith in those estimates as I would in an assumed 6% rate of return for my stock investments.

    The Federal Government should not be in the business of relying or making such projections. The Fed and the Treasury were sure bailing out Gm was a much needed and much required intervention (among other businesses). Today we discover American taxpayers lost big on that gamble. Never mind the bankruptcy laws and the appearance anyway of rewarding success. Today, there is no longer a moral hazard for such inferior business operations. There is “the cleaner” waiting in the wings to tidy up the mess.

    And if we cite the CBO, readers should be aware that while they may be non-partisan, they are not non-political. My own personal research using the CBO back when Clinton was in office demonstrates their flaws in how they put their numbers together. On the budget deficit gave Clinton credit for creating a budget surplus in his last four years of his administration…yet the Federal Deficit increased in all 8 years Clinton was in office. Huh??? What kind of accounting magic was the CBO using?

    I don’t know what is needed to get the country going. I just think the issues should be open to debate.

  3. 3 Martin August 15, 2012 at 1:08 am

    “to try and make sure that I can check my premises so that I know that what I’m believing and doing and advancing are square with the key principles of individualism…”

    I found this to be the most stunning passage; apparently Paul Ryan has outsourced his morality. It’s okay to be an “individualist”, but I’d think that morality is a bit more than deduction from first principles.

    Plus, where do those principles come from if not they’re not a brief summary of what we consider to be moral in general?

  4. 4 dajeeps August 15, 2012 at 4:20 am

    Well, we know who Ryan has been hanging out with recently: A story about a Paul Ryan/John Taylor op-ed from 2010 forecasting inflationpocalypse is the Fed should do QE.

    http://www.bloomberg.com/news/2012-08-14/romney-ryan-see-fed-qe-as-inflation-risk-amid-low-prices.html

  5. 5 sherparick August 15, 2012 at 5:28 am

    Although libertarians and Randians, (not necessarily the same thing), often try to justify their policies on grounds that they will “lead to more economic growth and prosperity,” when you really read their ur-texts, or something like Ryan’s 2005 speech to the Atlas society, that economic prosperity is not the goal. Rather, they believe that individuals who are “creators – producers” are entitled to al the wealth of society by matter of right. Hence any taxation, the involuntary coercion of society taking money from the “creators – producers” is wrong. Ryan’s original 2011 budget, the Tea Party Congress’ Ur-document, reduced the captial gains tax to 0%, is a testatment to this ethical view. The “hard money” view of Ryan is also in accord with the ethical view of preserving the wealth of the “super elite” over general prosperity.

  6. 6 Wimivo August 15, 2012 at 7:07 am

    I second Martin’s notion. And the irony is incredible.

    “I need Rand to tell me how to be individualistic!”

  7. 7 Eric Dennis August 15, 2012 at 10:38 am

    David,

    Has it occurred to you, just for a moment, that advocates of a gold standard–and especially those writing in a time when the dollar was still (tenuously) pegged to gold–are not fetishists, that they were not primarily concerned with gold itself, but with how the monetary standard emerges? The gold standard was arrived at through the voluntary actions of market participants over ages and ages of experimentation.

    The concern with current fiat money standards, as was stated right there for you in the Ayn Rand quote, is not that they fail to pay tribute to the one true metal, but that they subject the money supply to the arbitrary power of bureaucrats. For someone who has experience with alternative, market-based monetary systems, and who is constantly bewailing decisions made by the monetary bureaucrats currently in power, it is puzzling that your reaction to such a concern would be so elaborate and hysterical.

  8. 8 Floccina August 15, 2012 at 10:40 am

    I feel similarly about Ayn Rand and I am a pretty far out Libertarian.

  9. 9 Ravi August 15, 2012 at 10:46 am

    this certainly presents market monetarists with a dilemma. on the one hand, i think many MM types are predisposed to taking a hard look at the entitlement state. on the other hand, mankiw has gone silent on his monetary policy suggestions, and ryan seems a bona fide wingnut on monetary policy. of course, the fed is supposed to be independent, and it is questionable what effect a president or VP has on them, but it would be naive to think there won’t be pressure on them at all.

  10. 10 Cassandra August 15, 2012 at 2:08 pm

    In the event no one has read it, Tobias Wolff, in “Old School” conjures the most delicious somewhat surreptitious smack-down of Rand. The book is worth the read in its own right, but the Rand episode had me rolling on the floor in hysterical laughter.

  11. 11 Will August 15, 2012 at 5:13 pm

    “she loathed and detested Hayek as a compromiser.”

    What a badge of honor for Hayek! Even though Rand sometimes excommunicated comrades for rather slight deviations, I think she was correct to see Hayek as too pragmatic for her liking. This is what makes his function in present rhetoric (as shown in Ryan’s speech) so curious.

  12. 12 David Glasner August 15, 2012 at 8:32 pm

    Julian, I am not making any comments about Ryan as a candidate for vice-president or about his career as a member of Congress. I was strictly referring to the bizarre comment about where he goes when he thinks about monetary policy. There is also an element of dishonesty in his attempt to disguise his attachment to Ayn Rand, but that unfortunately is probably within in the norm for a candidate for high office. Greenspan may have been a Rand groupie during his younger days, but he seems to have been able to compartmentalize his private beliefs from his role as an economic adviser to politicians (Nixon and Reagan) and a government official. Lawyers do that all the time.

    Mark, The budget deficit depends to a far greater extent on the state of the economy than on decisions about taxes and expenditures. I don’t say that taxing and spending decisions are not important, but you can’t realistically do anything about our debt problem and budget deficit unless the economy is operating in the neighborhood of full employment, which it has not done for over four years. I am afraid I have no idea what you are talking about concerning the budget deficit and CBO under Clinton. And just as an aside, you seem to be attaching exactly the opposite meaning to “moral hazard” of the meaning that “moral hazard” is normally understood to have.

    Martin, I think that you are being a tad too hard on Paul. I think he has decided based on whatever criteria he uses, that his moral intuition accords with Ayn Rand’s moral position. He views Rand as having superior capacity for moral reasoning so he tries to check his own moral intuition against Rand’s reasoning. I am appalled that anyone would consider Ayn Rand as an authority on moral reasoning, but once you get over that hump, I don’t think it’s quite fair to say that he has “outsourced” his morality.

    dajeeps, Yeah, I saw that they are a team. Doesn’t exactly calm my nerves.

    sherparick, I think that there is a legitimate argument to be made for not taxing the income from capital, though I have never understood why capital gains of all forms of capital income deserve preferential treatment. Actually as I write this, I am thinking that the only form of capital income that should be exempt from taxation is income on assets that have been held for long-term investment. Trading profits should be taxed at a rate at least as high as ordinary income. That’s just off the top of my head.

    Eric, I don’t think that you read what I wrote carefully. I was not criticizing advocates of a gold-standard in general, and I was not even criticizing the gold standard (though I have previously done that several times on this blog). I was registering my shock and astonishment that a supposedly serious man could publicly state that when he thinks about monetary policy he goes to the ridiculous speech of a ridiculous character in a ridiculous book by an even more ridiculous author in which gold is described as “objective value, an equivalent of wealth produced.” That is just nonsense — fetishistic nonsense. The gold standard was not arrived at through the voluntary actions of market participants. It was arrived at by virtue of the historical accident that Great Britain (actually Isaac Newton when he was master of the mint) overvalued gold relative to silver, thereby triggering Gresham’s Law driving silver coins out of circulation. My problem in this post is not with the gold standard as such, but with the idea that a supposedly serious man could cite such a passage as the foundation for his thinking about monetary policy. Funny, but I thought that my reaction was quite restrained and even-tempered.

    Floccina, I certainly don’t impute Randian views to all Libertarians. If you listen to Objectivists, they go out of their way to distinguish themselves from mere libertarians.

    Ravi, Certainly no good choices out there that I can see.

    Cassandra, If you can forget, for a moment, about what an appalling creature she was, there was indeed something rather comical and absurd about her.

    Will, That’s exactly how I feel. Hayek is often invoked as a kind of libertarian totem, but his views are a bit too subtle for the average libertarian geek to really get a handle on.

  13. 13 Morgan Warstler (@morganwarstler) August 15, 2012 at 8:49 pm

    Oh good Jesus, well you’ve gain commenters, but lord they are a bunch of [redacted].

    1. TRICKLE DOWN: It isn’t about $$$$. See Sumner’s China Housing post if you need something you respect.

    But more importantly, ALL HUMAN BENEFIT comes from Technology.

    If you don’t grant his fact, further discussion is worthless.

    Once you grant this fact, then the most important thing a market economy can do is SPEEDING up the technology turnover…

    This means plenty of false-starts, and high end rich bastards trying all kinds of new fangled stuffed that doesn’t make it out of the gate.

    It DOES NOT MEAN Obama paying off whichever donors pretend to be entrepreneurs.

    Importantly it also means, policies that favor newco formation, and put all costs of regulations on the big old Fortune 1000, none on the start ups.

    2. Ayn Rand – listen you bunch of second raters, moochers – respect your betters.

    3. Gold. Ayn Rand, et al in modern day would support BitCoin.

    WHY? Becuase it isn’t run a by govt. It is LIMITED, but infinitely divisible. And most importantly, MONEY and Monetary policy s not a tool for social good.

    Look, if you START your conversation ASSUMING that money and monetary policy ARE Public Goods….

    That’s wrong, but more importantly NOTHING you say after disagreeing with that idea directly contradicts what Gold Bugs, and Paul Ryan, and Ayn Rand and anybody saying this stuff is asserting.

    The point is that Govt. doesn’t create money. MOney is generally born out of the need for creators of the world to go about their business.

    Infact, if you watched Day 1, after the USSR fell, you saw the govt itself, like money and monetary policy is not a “majority group” effort –

    instead a handful of really competent guys with ASSETS and POWER (guns and $$), etc. hire some big guys to protect their stuff.

    AND THEN, they form a govt. to figure out how to pay the big guys not too much money, and they create “rights” to get the rest of the masses to go along with it.

    So if you want to be intellectually stimulating and go after Ryan / Rand et al – do the HARD WORK:

    1. assume money isn’t a social good, that it is controlled by and run for the people WHO HAVE MONEY.

    2. then argue to THEM, and THEM ALONE, and not the mob of people who have no money WHY they should do X, Y, Z.

    Now your arguments are REALISTIC. Now you are pitching the top 1/3 of America who OWNS EVERYTHING, including 200M guns, and VOTES ALL THE TIME.

    Those people, the top 1/3 – they are the hegemony.

    The hegemony looks at money and the Fed, and Monetary policy as if it is FOR THEM ALONE.

    And all of you, yammering here, don’t even have the deep intellectual balls to be HONEST about WHY you FAIL at getting your way!

    You start off PRETENDING facts that are not in evidence!

    Anyway, I’m not saying that you can’t WIN the argument to the hegemony, I’m just saying that since you aren’t even admitting who gets to DECIDE – your lame attacks are just lame.

    You come across like a bunch of wannabe’s.

    Obama thinks you all shot your wad.

    Romney will get a TON OF QE3 poured on him, because he’ll slash public spending in out years, and puts deflationary pressure on GDP, and that means the Fed PUMPS.

    It is in Obama’s power to get printed money – he just has to announce that he’s cutting public employee pay by 20%.

    OVERNIGHT the Fed has to print.

    So when Romney / RYAN gets the QE – remember they MADE IT HAPPEN.

  14. 14 Mark Stamatakos August 15, 2012 at 8:50 pm

    Spot on insight Eric.

    I see it this way. A truly free unregulated market without central banking is not immune to panics, bubbles, buffoonery, or immoral behavior. But it should do a sufficient job of eliminating these elements quickly.

    Overly controlled markets (like ours) still suffer from every single symptom that you might encounter in the Free market. Man, incorrectly, assumes that having this control mitigates these factors. Perhaps it does to a degree but economics is not an algebraic equation that solves for x every time.

    In that case, I would rather have the free unregulated market where bankruptcy laws and private property rights police the market. Those flaws seem the lesser of two evils to me.

  15. 15 Blue Aurora August 16, 2012 at 12:56 am

    Out of curiosity David Glasner, were you ever a libertarian at any point? I remember reading somewhere that there was a fellow with your name that published in the libertarian journal The Freeman. Would that person be one and the same? Would you now say that you are a liberal, or a conservative, or neither?

    I personally am not too fond of Ayn Rand either, and I think that Romney’s decision to pick Paul Ryan brings too much baggage. If I were in the Romney campaign, I would have picked Marco Rubio, unless Rubio had something that would prove too costly for the ticket.

  16. 16 W. Peden August 16, 2012 at 4:48 am

    I would have preferred Mitch Daniels. I like a lot of libertarians/minarchists, but Ayn Rand isn’t one of them.

    Oh well, if it brings Daniels/Huntsman 2016 closer, then fine.

  17. 18 David Glasner August 16, 2012 at 9:38 am

    Morgan, Welcome for your semi-annual visit. Sorry, but I frown upon abusive (and otherwise offensive) language so I had to do a little editing on your comment.

    I agree that technology provides benefits, I don’t agree that it provides all benefits. If that ends the discussion, so be it.

    But, moving on, I would further point out that even if we stipulate that technology is the source of all human benefit, it is still possible that it is the source of disbenefits, in which case it does not follow that speeding up the pace of technological turnover is always better. The optimum may not be a corner solution.

    So I am not convinced that the costs of startups should be borne by people other than the starter uppers.

    About Ayn Rand being better than anyone, I think the following story told by William F. Buckley, whether true or apochryphal, sums it up pretty well.
    “At a dinner [for the 1950s Freeman], Ayn Rand contradicted Mises on some doctrinal point, causing the eminent professor to stop eating and mobilize his scorn and fury on her. Ayn Rand thereupon burst into tears and exclaimed, “You are treating me like an ignorant little Jewish girl!” Mises jumped up from his chair with joy. “That is exactly what you are! An ignorant little Jewish girl!”

    Morgan, I could not care less what Ayn Rand would support in the modern day.

    Morgan, OK I am outsourcing the hard work to you. You know how to communicate with THEM better than I do.

    Mark, You assume that there is a truly free, unregulated market out there just waiting to be turned on and put into operation. No such market exists, every market operates within a legal framework that defines the rights and obligations of transactors and small changes in those rights and obligations can have very big effects. Arguments about regulation — both pro and con – are just out of touch with reality.

    Blue Aurora, My memory is starting to fail me, but it is possible that I was a libertarian for an hour or two, not much longer than that, when I was an undergraduate. I always viewed myself, and still do, as a classical liberal with conservative (in the Oakshottian sense) tendencies. My conservatism leads me to be very skeptical of any change that is not incremental, which makes me very uncomfortable with the direction that American conservatism seems to be headed in. Yes I did publish a few articles in the Freeman, and I see that Morgan Wastler has kindly provided a link.

    W. Peden, I agree that there is something steady and solid about Daniels.

  18. 19 W. Peden August 16, 2012 at 9:51 am

    David Glasner,

    And compromising without being unprincipled. As someone with socially liberal views (at least insofar as government policy goes) I’m glad to see any conservative who is willing to call a “truce” on social issues, given the important economic challenges of the day. I also can’t see Daniels lecturing the Fed (though sadly I could be wrong).

  19. 20 Frank Restly August 16, 2012 at 9:54 am

    “So there you have it; this is where Paul Ryan goes to think about monetary policy. Let’s read it again: “Destroyers seize gold and leave to its owners a counterfeit pile of paper. . . . Gold was an objective value, an equivalent of wealth produced.”

    Gold is an inert rare element. The value of gold relative to other goods is completely subjective. It functioned for a while as a form of currency because it is easily identifiable, has a relatively fixed supply, does not corrode or degrade, and is divisible into smaller units.

    “The problem, says d’Anconia, is that statists — looters and moochers — see dollar signs and think they can, must redistribute them. “Whenever destroyers appear among men,” he says, “they start by destroying money, for money is men’s protection and the base of a moral existence.

    The entire U. S. government bond market is a mooching scheme. It pays a guaranteed rate of return while requiring no productive effort. Those payments are funded by tax revenues taken from production.

    Of course you won’t hear that from Paul Ryan. It would absolutely abhor him to admit that the writers of the Constitution did not share his views on unfettered laissez faire capitalism.

    Capitalism without rules and contracts (aka a set of legal protections) is not capitalism. It is anarchy.

    Hence,

    “Not an ocean of tears nor all the guns in the world can transform those pieces of paper in your wallet into the bread you will need to survive tomorrow.”

    Here Rand is making a not so subtle reference to imperialists with guns and socialists with tears. Of course those guns also are the final protection in the legal system. And those tears are a wordless expression that a rule has been broken or a contract renegged upon.

  20. 21 Jim Caton August 16, 2012 at 11:06 am

    I am not a fan of Ryan, but we must take some things into account in considering his supposed views:

    1. He was speaking at an Atlas event. Politicians cater, almost exclusively using oversimplifications, to convey commonality with voters.

    2. In another piece (forgive me for not quoting) Paul said that he voted for the bailout because he was worried about a dramatic fall-off in AD from which the economy might not recover. Not very Randian if you ask me.

    3. I doubt that Paul either wants or has the ability to bring hardcore, pro gold standard ideologues into the White House.

  21. 22 Becky Hargrove August 16, 2012 at 2:01 pm

    What I would ask Paul Ryan if I had the chance: How do you REALLY feel about maintaining open markets and economic access for all? Not all libertarians (such as myself) think about those issues in the same ways, and often a preference for a gold standard is little more than saying there are limits to prosperity in general. Even so, Paul Ryan would probably have a greater influence on public policy than many VPs should Romney win, in the sense of being a sugar coated bitter pill that some now believe they must swallow. The fact that Ryan was so taken by Ayn Rand makes me wonder what he really believes about wealth and continued progress.

  22. 23 Becky Hargrove August 17, 2012 at 6:00 am

    Update: in regard to your post, Kurt Schuler at Free Banking asks us to remember Paul Ryan’s voting record and I agree that normally such a strategy is certainly sufficient. However we do not live in ‘normal’ times.

  23. 24 Eric Dennis August 17, 2012 at 11:07 am

    David,

    Whether or not gold would have emerged as the dominant reserve asset in the absence central banks in the 19th century—or whether a bi-metalic standard would have persisted—is a red herring. The emergence of a physical commodity standard, as opposed to a fiat currency standard, most certainly was the result of voluntary, market action.

    And this is exactly the issue Ayn Rand is naming in that quote you dismiss. (“Gold was an objective value, an equivalent of wealth produced.”) Incidentally, from the context of the quote, it is clear that she is not imputing to gold prices some mystical quality of invariable measurement. Rather she is observing that when something acquires exchange value as a result of voluntary action in light of its objectively desirable properties, there is something very different about that value, than when something acquires exchange value as a result of politicians coercing people to accept what they otherwise would have regarded as a poor money.

  24. 25 Alex1 August 18, 2012 at 5:47 am

    Wait, wait, wait, let me get this straight.

    “Gold was an objective value…”

    So Gold’s value is objective, or, should we say intrinsic.

    …an equivalent of wealth produced… your claim upon the energy of the men who produce.”

    And this objective value is somewhat connected to wealth produced by the energy of producing men, i.e. labour.

    And then we hear something about these producing men being exploited.

    Now wait a second, I heard something like this before, but I cant seem to remember where…

    http://www.worldsocialism.org/articles/introduction_to_marxian_economics1.php

    OH. MY GOD. IT ALL MAKES SENSE NOW.

    McCarthy was right, the Manchurian Candidate was hiding in plain sight all along…

  25. 26 David Glasner August 18, 2012 at 8:22 pm

    Frank, You said:

    “The value of gold relative to other goods is completely subjective.”

    Precisely!

    Jim, I can see going to Iowa in search of votes and extolling the wonders and virtues of ethanol. I can’t see going to the Atlas Society in search of votes. I was just focusing on a single statement that he made. The sort of cultish adulation that he expressed for Rand is nonetheless disturbing to me. I have no clue who he will bring to the White House.

    Becky, It makes me wonder too.

    Eric, My point is that market action is highly sensitive to small changes in government actions or policies or legal enactments. I don’t think that I was suggesting that she was imputing any mystical quality to gold, but the idea that gold constitutes an objective value is no more sensible to me than Marx’s claim that labor constitutes an objective value. I have no idea what the objectively desirable properties of gold are that confer on it any greater capacity to measure value than any other commodity. Dollars are held and used in transactions all around the world, in places far beyond the reach of the US government or its laws. By every market test, dollars are today preferred by people over gold as a medium of exchange and a standard of value. So dollars are clearly regarded by people around the world as a very excellent money, the best money that money can buy.

    Alex1, When did McCarthy ever talk about the Manchurian Candidate? Thanks for the link.

  26. 27 Mark Stamatakos August 18, 2012 at 11:51 pm

    David,

    I used the word free and unregulated market too strongly perhaps. I guess what I meant to say was that a market system that is freer from government interference and regulation has fewer inherent evils than one more controlled by one. I offer this view based on evidence from my own experience and what I have read about. Maybe you don’t agree or could clarify where I am wrong here.

    1) Fannie and Freddie Mac have been catastrophic disasters. Lets thank FDR and LBJ for these. In a noble attempt to help “spur” the economy and seize business away from private banks, we lead ourselves right into a housing apocalypse.

    That is government interference in private markets. Banks did this for years but the government wanted to get some action here. So Fannie and Freddie had carte blanche to give houses to any and everyone. Bad idea. Why not??? The government covered the losses.

    If private banks do this, in theory, they go under. But not today. Today, they flood the airwaves with the armeggedon that will occur if they don’t get help, and the government bows. That is the kind of market I am deploring here.

    2) 2 Bailouts from Bush and Obama haven’t proven to have effected much of any positive outcome (and the argument they halted the existence of a “Great Depression” is extremely debatable). All I can see is more debt and an economy growing used to more stimulus as a matter of habit. Krugman wants QE 3. The investors want a QE 3, and we know the corporations would love some more money. What did I do with Bush’s $400 bucks back in 2007? I put it in the bank. Stimulus money has encouraged precisely the opposite behavior than it intended. People saved it (or paid down their debt). Stimulus programs haven’t refueled the consumer-addiction they intended. The business cycle should be sufficient to do that. Regulation of a free market has spawned years of vapid consumerism. Americans don’t save because of government interference.

    3) Existing laws and regulations on the books did not prevent financial shenanigans in derivatives and credit default swaps. Banks have been leveraging themselves wildly for years, and “regulation” bills like Dodd Frank seek to curb that leverage. But leverage isn’t the problem. Giving big bonuses to hot-shot gamblers is the problem. So if we regulate that, and “control” the likelihood of another Bear Stearns, what will that do to our markets? And anyone who honestly thinks another regulation won’t create two more hoops a corporation will jump through to avoid it, they do not understand the futility of trying to regulate behavior.

    4) Government interference in the college loan business has worked out real well. What else could be causing the price of a college tuiton to increase 1,137% in the last 30 years? Do you think if this was truly a private market, with the government not in the business of giving away money to millions of students who have no business attending college, that the price of a college education would be this high? But since anyone can go to college if they can hold a pencil (because they can get a loan from the Fed Gov.), we now have a service that has risen 4x the rate of inflation. Some deal there.

    5) Government programs like Medicare and Medicaid have only fueled rising costs of medicine. Same logic as government backed college loans. Why not keep jacking up prices when you know Uncle Sam has you covered?

    6) Cash for clunkers, more government interference, worked out exactly as most economists predicted. People took advantage of the tax credit engaging in activity they would have done anyway. It created a void in demand and led to thousands of perfectly good cars to be destroyed driving up the price of used cars. More government manipulation, and more laws of unintended consequences. Now consumers sit around waiting for the next handout, give-away, or goodie bag. Is Uncle Sam now a crack dealer? What next? Homes for Lexuses?

    7) Ethanol subsidies? Do I really need to go there? How many unintended consequences has resulted from this government interference.

    8) How about government interference in public education. For 60 billion dollars a year circa 2012, do we have higher test scores for our children in public schools? Have we since this position was created? No.

    You claim that arguing the pros and cons of regulation is out of touch with reality, but I claim to ignore just these few example is delirium. Why are we broke David?

    I’d also like to pick your brain on inflation, which you claim (by citing L.B. statistics) is under control.

    Inflation under control? What exactly goes into this calculation? Are people nuts? Under 2%???? CPI is as politicized and twisted a number as there could possibly be. Anyone who believes inflation is rising gradually is smoking something. If we used the CPI index as it was calculated 40 years ago, and stopped buying this nonsense that trusting this number provided by the GOVERNMENT is accurate, we might just realize for ourselves that we have destroyed the dollar and are truly living in inflated times. I’d say its closer to 5 or 6% a year. Or should we trust the experts running the labor bureau? Why? Are they paying my property taxes, my tuition bills, my fuel costs, my food costs? These have risen WAY more than 2% David…and that includes from 2008 to present. Want some other examples? Ground Beef (up 75% since 2002). Soda. Coffee (up 100% since 2002). Gas ( up 400% since 2002 per gallon, and in Illinois where I live its worse), You can quote the CPI all you want, but a simple budget program that tracks my food costs blows the Labor Bureau’s CPI out of the water. What food item has come down in price that I can actually utilize to get my inflation under 2%?

    Housing? Not doing me any good let me tell you. Interest rates on mortgages? Can’t refinance I’m underwater and used Harp already. The only thing I have that has increased in value since 2008 is the gold I own.

    The biggest downfall of over-regulation and government interference has been the destruction of the American spirit to be independent. Everyone, from the wealthy business man to the poor minimum wage job earner has learned to expect that the government will provide them with some means to mitigate their circumstances. The New Deal has left us with generations of people who do not value saving, who lust for vapid Consumerism, and who expect the government to do something about it. That to me is why a freer, unregulated market, while flawed, is superior to today’s perversity.

  27. 28 W. Peden August 19, 2012 at 10:23 am

    Mark Stamatakos,

    If you use the CPI index as it was calculated 40 years ago, then the US had been in depression since 9/11, and the US economy hasn’t been anything impressive since Jimmy Carter’s great economic policies.

  28. 29 Alex1 August 19, 2012 at 2:44 pm

    Well, I’m not sure McCarthy ever mentioned the manchurian candidate (Im quite sure it was after him) by the name, but the way i understood that episode (I admitedly wasnt born for quite some time) is that basically the idea of a “manchurian candidate” was the metaphysical arch-nemesis which McCarthy sought to uncover. It was this concept of a communist infiltrator who could hide in plain sight and work himself up to the highest office, only to then offer the US as sacrifice to his red masters. The irony of the actual novel of course is that the manchurian candidate is exactly the one which seems to be the most polar opposite of such an infiltrator. The book itself implies its McCarthy (or more precisely his wife).

    [Note: this is were the post just becomes a bit of satire - feel free to not post it if you dont find it funny]

    But if we were to insist that there is such a conspiracy in real life (how could it not be true?), it obviuosly cant have been McCarthy – he was censured by Congress, which obviously is Commie infiltrated. No, it must be someone else. Obama seems the obvious choice. however, following the polar opposite rule, he is immidiately disqualified. So it has to be his opponent… enter Paul Ryan. And now think about what Marx’s theory actually said. Forget political Marx, focus only on Marx the economist. Think about the falling rate of profit. Think about the “anarchic” nature of the capitalistic mode of production. Think about his idea that the capitalists constant desire to turn v into v’ will at one point exhaust all investment opportunities, at which point it can only sustain itself through ever rising exploitation, unknowingly breaking the control mechanisms which held the working class back in the first place. And now think again of Ryan. His desire to free up business. His desire to cut social security. And now think of the few true patriots still standing to defend the US. No, its not who you think. Its the brave men and women from the FED, giving all they have to save this “anarchic” mode of production from sowing the seeds of its own destruction, thus forming a thin green line between freedom and eternal stalinisit oppression. And now think of Ryan again, trying to tie the FED to a cross of gold, striking at the heart of this final line of defence. Then, when the anarchic mode of production once again succumbs to a bubble, when once again the rate of profit goes into free fall, the FED will not be able to do anything to save it. No more liquidity injections to save the banks. No maneuvrability for the gov’t to do auto-bailouts. No saviour from the foreclosure. And then, once more and more fall straight to subsistence, with all nets that were supposed to catch them having been clandestinely cut apart and sabotaged by the Ryans of this world, they will be ready for their conversion by the red prophets. And the “free marketeers” will take off their masks, unveil ther red banners, and convince the suffering citizens, who now no longer have an alternative, to beg for their own oppression. And then, only then, will Mr Ryan be allowed to return to China, where the recently thawed Mao (who had been frozen in Carbonite to preserve his vital powers) will await him to provide him with his rewards.

    Yep, its pretty easy to turn all of these Randian stories around

  29. 30 Mark Stamatakos August 19, 2012 at 2:54 pm

    W. Peden…

    Maybe that is the point? Since your response doesn’t represent any of the data I found regarding my own costs, I am not sure how you are offering anything to debate other than the current CPI formula for calculated inflation is God’s gift to mankind. Maybe, just maybe, the CPI is another tool the government uses to justify it’s ever-expanding existence, with increasingly limited or negative returns.

    And you do not have to be an economist to see that.

  30. 31 W. Peden August 19, 2012 at 5:50 pm

    Mark Stamatakos,

    Here’s a chart of real GDP with an unmodified price index-

    http://www.shadowstats.com/alternate_data/gross-domestic-product-charts

    It implies that the 1990s “boom” never saw a year of even sub-normal growth; that the US never recovered from the early 1990s recession; and that the US has been in depression (with only a sliver of momentary growth in 2004) since 2000. It would take some convincing before I regarded those as anything other than reductio ad absurdums of using old price indexes.

    “Since your response doesn’t represent any of the data I found regarding my own costs”

    The plural of ‘anecdote’ is not ‘data’.

    “I am not sure how you are offering anything to debate other than the current CPI formula for calculated inflation is God’s gift to mankind”

    Not at all what I said. I think that the whole practice of using price indexes over long periods of time is very fishy, because there’s no non-arbitrary way of handling improvements in product quality. Insofar as price indexes are unavoidable, it’s better to use either narrow cost-of-living indexes or broader indexes like the GDP deflator.

    “Maybe, just maybe, the CPI is another tool the government uses to justify it’s ever-expanding existence, with increasingly limited or negative returns”

    If (a) real GDP has contracted since 1990, (b) the general American standard of living has increased since then, and (c) government spending as a percentage of real GDP has increased so dramatically over the past 20 years, then roll on big government!

    I haven’t seen government spending as a % of GDP figures based on the shadowstats data, but I’d imagine that government spending must be in the 60-80% range by now. If that delivers high-tech industry, the danger of obesity even for the very poor, and a general standard of living that most of the world envies, then maybe, just maybe, big government is the way to prosperity.

    Or maybe not. I don’t believe the above paragraph, and neither should you.

  31. 32 mark Stamatakos August 19, 2012 at 10:12 pm

    W. P.

    I’m afraid I am a little in over my head on this site. I am not an intellectual and I certainly don’t have squat for an economics background. Could you help me understand how I should interpret the following information related to inflation. David, jump in if you can as well.

    College costs, health costs, property taxes, fuel costs, and food in general, which compromise a major chunk of the bills I pay, have not risen 1-2% since 2008. They have, in general, far surpassed that and more. I can only speak to what I pay for my bills. If that limits my information to being strictly anecdotal, then perhaps I am an outlier compared to other Americans.

    On the flip side, my wages have been frozen since 2009. I am a humble middle school teacher. My 3 year contract was frozen. Wages, in general, for my district have been rising very slowly since 1996. We had averaged about a 2-3% increase, steadily, up until our last contract.

    How can I see a CPI that says between 1-2% since 2008 and take that seriously. What exactly has sunk in price (or steadied) enough to impact the amount of money I can keep?

    Thank you for the dialogue.

  32. 33 W. Peden August 20, 2012 at 3:55 am

    Mark Stamatakos,

    That’s a very good question, which I think gets to the heart of the problems with a lot of price indexes. A similar question would be someone living on an inflation-linked pension, who faces costs for heating and food that are rising faster than the CPI inflation rate.

    The answer is that in a market economy prices do not “march in step”, so to speak i.e. prices for some products may be rising while others are steady or even falling. For example, it wasn’t long ago that having a DVD player was a mark of wealth. These days, you can get 3 or 4 DVDs for less than 1 DVD would have costed 10 years ago. The same goes for computers, clothes, cars and just about everything that can be imported from emerging markets. (This is sometimes called the “China Factor”, but actually it’s also due to countries like India and South Korea. In general, as the industrial output of these countries has increased because they’ve adopted more market-orientated policies, the things they produce have gotten cheaper.) In addition, the quality of most of these goods has improved dramatically even in the past few years, and certainly over the last 30 years e.g. a PC today is a much better possession for most of us (apart from those who want to play retro games) than a PC from 1982. It’s never been such a good time to be aged 10-30; I wish quality designer clothes had been as cheap when I was at high school as they are today!

    On the other hand, things that are increasingly consumed by emerging markets or which can’t be imported have gone up in price, sometimes dramatically. Examples of the former are fuel and food, which have gone up a lot in price as you note. Examples of the latter are housing (a cheap house made in Shanghai is little good if you work in Chicago) and teaching (there’s not much competition in universities between China and the US, partly due to the language barrier). As far as I know, house prices in the US are falling in general (they are here in Scotland, but not everywhere).

    If those of us who are young, single and in countries with good public transport systems were more reflective and economically educated, we’d all go on about how we live in an age of Great Deflation. The things we buy are getting cheaper all the time (except for college tuition, which is free for undergraduates in my country anyway). From the point of view of someone trying to raise a family or live off a pension, the situation is very different.

    So the official inflation figure may be 2% (and as I say it’s dubious because I think it violates some basic principles of microeconomics to have experts judging changes in quality over time) but that doesn’t mean that every price is rising at a steady 2% rate. Some prices are rising much faster and some prices are falling.

    Therefore, it’s possible that both your experience and the official figures are right: the things we buy and prices in general are two different things. My experience over the past 10 years has been one of a long period of deflation, because I don’t have kids, don’t have a car, don’t have a mortgage and I only major rising cost I’ve come across is that of postgraduate education.

  33. 34 Ravi August 20, 2012 at 3:15 pm

    it looks as if romney is jumping on the “audit the fed” bandwagon, which is just a step away from the “inflation only” mandate – which we’ve seen to devastating effect in europe. one party thinks monetary policy doesn’t matter and one wants to actively impede it. this doesn’t presage a happy ending.

  34. 35 Eric Dennis August 20, 2012 at 6:34 pm

    David,

    The objectively desirable properties of gold are not about any unique capacity it has to measure value but about its capacity as a medium of exchange (fungibility, malleability, etc.) and a store of value (permanence, physical supply limitations, etc.).

    Of course paper dollars are desired by many today, due to network effects. But such effects would never have attached to such an inferior money, whose supply is limited only by the good will of bureaucrats, without it being forced on the public by FDR’s gold confiscation law. Indeed it is only because of these network effects, operating across time rather than space, that we still use paper dollars.

  35. 36 David Glasner August 24, 2012 at 1:39 pm

    Mark, I just don’t know how to evaluate the proposition:

    “a market system that is freer from government interference and regulation has fewer inherent evils than one more controlled by one.”

    A lot of regulation is, in my view, harmful and counterproductive. Other regulation may be very important and beneficial. It depends on the circumstances and problems that give rise to the regulation and the manner in which regulation is implemented whether the regulation is harmful or helpful. Abstract and absolute statements that regulation is always good or always bad without being grounded in an understanding of the specifics are nothing more than an expression of a personal ideology or a political agenda.

    You are impugning the integrity of the government’s inflation statistics. That is your prerogative, but if that is your concern, you ought to do address to someone other than myself, because I have neither the factual nor the statistical knowledge necessary to evaluate that concern. However, I certainly am not impressed by your citation of particular commodities whose prices have increased substantially since 2002, as if there were any reason to expect that, with zero inflation, no prices would double in or even triple in the course of a decade.

    W. Peden, Thanks for your cogent responses to Mark with which I agree.

    Eric, Inconvertible paper money was around for a long time before FDR. FDR’s draconian steps were not necessary to establish a fiat money standard. To the extent that they were necessary, it was to overcome the perverse effects of gold clauses which had been attached to many private contracts, allowing creditors to extract huge and unconscionable windfalls from debtors as a result of the enormous increase in the value of gold between 1929 and 1933. In the context of the situation in 1933, abrogation of those gold clauses was an act of the highest statesmanship, though I think less extreme measures might have accomplished the same objective.

  36. 37 Frank Restly August 24, 2012 at 7:13 pm

    David,

    “In the context of the situation in 1933, abrogation of those gold clauses was an act of the highest statesmanship, though I think less extreme measures might have accomplished the same objective.”

    Personally I think contract abrogation perpetuated by an entity responsible for the legal protection of contracts (the federal government) is bad policy and bad politics.

    Nonetheless, there were contracts unrelated to gold in the United States that were maintained as well. For instance, patents and trademarks were not revoked, much to the chagrin of free market laissez fair economists who believe in contract abrogation.

  37. 38 Mark Stamatakos August 24, 2012 at 11:10 pm

    David…

    Sorry if I sounded hostile. Perhaps my trouble is that I spend too much time listening to Ron Paul and reading George Orwell. :(

    I appreciate the responses nonetheless, and taking the time to respond to someone with a limited grasp of the arena. My intent is not to come here to be a naysayer or misdirect the discussion (but that is probably what I am doing…sorry). Perhaps your site here is a running dialogue sans the political spin, but I am not sure how you can hold economics out there as if it were in a vacuum. Economics and politics are intertwined in ways that convince me we should be skeptical of the impact one has over the other.

    Is unemployment accurate? How can we take this figure that is released every month by the government and not laugh at it. It does not include workers who have given up looking for work. Is this not a gross enough evasion for us? Kennedy hated high unemployment so he had his boys tweak the way it was calculated. Why not report the real number?

    Johnson’s administration played funny numbers games with the social security surpluses, all in the name of making the budget look better than it is. Again, manipulation of how we look at numbers to get a more favorable impression. A deliberate deception.

    I would argue or defend the following: you seem to either be explaining away, or claiming as invalid that my tracking of food price increases doesn’t pass muster in relation to the CPI. My experience is truly in contrast to the figures the government is listing and to what you are refuting. Empirical evidence has merit David. In terms of my budgetary situation, inflation is not rising 2%.

    In the old days, before the Clinton administration changed (yet again) the way we look at inflation, a basket of groceries from one year to the next was calculated for the price difference. The government, understanding that continuing to do things this way was going to lead to crappy numbers, added a little bit of illusion with alchemy and figured out a way to mitigate the CPI to make what it was doing look better. Take out cost increases year over year, add in Substitution, Weighting, and Hedonics. Would that be Moe, Larry and Curly???

    I suppose, if the Labor Bureau assumption stands to reason, that because Ground beef has risen almost 100% in the last few years that I should switch to hot dogs? From what I understand, that is what the CPI figures consumers are doing.

    And I don’t know what you understand about Hedonics, but from what I have read this is a blatant misrepresentation of prices under the assumption that all advances in technology can be factored in as consumer price savings. That sounds like voodoo if you ask me.

    I have read most of the summer that energy costs have been coming down to offset rising food prices. I ask myself this…where in my budget am I saving on energy costs??? (certainly not my electric bill, and gas prices have skyrocketed in Illinois again due to a broken pipeline somewhere).

    Laws of unintended consequences are also difficult to ignore. And when you factor what Ethanol has wreaked on the inflation rate of our food supply, I am not sure how the CPI can list inflation as relatively stable over the last few years when my grocery bill in little more than 5 years is 60 to 70% higher. Even if a bad weather cycle caused the most recent spikes in food prices, you’d hardly notice as the CPI is barely budging.

    And when you look around David, there is a lot of other empirical evidence that is difficult to ignore. I mean I can’t come to any other conclusion here other than the U.S. has been mired in a recession for a long time with massively high inflation. To me, we just crafted ways to lie to ourselves about it.

    W.P. your explanation does make a lot of sense to me. Surely there must be things the CPI tracks that have gone down in price. I guess since I rarely purchase those items in the economy that are being made cheaper over time (like electronics, appliances, or other staples), I am left on the other end of the spectrum. I am definitely an atypical American consumer because I rarely shop for anything. Food, energy costs, and house payments are mostly all I deal with. Those my friend are not rising at the meager increases the L.B. is putting out. Not even close.

    Perhaps that is why I am feeling the pinch worse.

    Just curious. Are we arguing gentleman that the CPI index is an apolitical tool of the government though? I mean the Labor Bureau is not some independent agency from the private sector. Is it at all possible that it has a vested interest in serving the administration that rules the White House a little more than it does in being accurate with the consumer? Seems to me that Republican and Democrat administrations alike have tweaked and hoodwinked the way we get data as the picture has gotten worse.

    Sounds like 1984 to me. But if we are being told that the chocolate ration has been increased this month by 3 grams per citizen (even if my own eyes and taste buds tell me otherwise), than surely the chocolate ration has been increased.

    David and W.P., thank you for your dialogue. Sorry for being such a negative dullard here.

  38. 39 Eric Dennis August 27, 2012 at 10:02 am

    David,

    Perhaps inconvertible paper money was around long before FDR. So were ham sandwiches, but somehow Americans resisted the temptation to erect a very poor monetary standard based on them. I didn’t mean for this to turn into a much larger argument about whether or not FDR could have corrected the Fed’s early deflationary blunders during the depression without abrogating contracts or leaving the gold standard.

    Your original assertion was about how silly it is to advocate a gold standard so as to put the money supply under an objective contraint, the laws of physics, rather than the benevolent discretion of bureaucrats. Perhaps Ayn Rand’s way of puting it was unfamiliar to you, but my aim was to indicate exactly what she meant and so why it is not silly at all.

  39. 40 David Glasner August 28, 2012 at 10:07 am

    Frank, I agree that contract abrogation by an entity responsible for the legal protection of contracts is bad policy. Unfortunately, by 1933 when FDR took office the situation was so critical that bad policy was preferable to the catastrophe that was then playing itself out. I don’t understand what relevance the revocation of patents and trademarks has to this discussion.

    Mark, I think that listening to Ron Paul except in small carefully controlled doses is definitely a hazardous activity. On the other hand, reading George Orwell is good for you. But if you think that you are living in the novel 1984, you might want consider seeking out the advice of a medical health care professional.

    You keep disclaiming any expertise about what you are talking about, and then casually toss out hand grenades like the following:

    “Kennedy hated high unemployment so he had his boys tweak the way it was calculated.”

    And then:

    “Johnson’s administration played funny numbers games with the social security surpluses, all in the name of making the budget look better than it is. Again, manipulation of how we look at numbers to get a more favorable impression. A deliberate deception.”

    And then:

    “In the old days, before the Clinton administration changed (yet again) the way we look at inflation, a basket of groceries from one year to the next was calculated for the price difference. The government, understanding that continuing to do things this way was going to lead to crappy numbers, added a little bit of illusion with alchemy and figured out a way to mitigate the CPI to make what it was doing look better. Take out cost increases year over year, add in Substitution, Weighting, and Hedonics. Would that be Moe, Larry and Curly???”

    Are you for real, or what?

    You said:

    “you seem to either be explaining away, or claiming as invalid that my tracking of food price increases doesn’t pass muster in relation to the CPI. My experience is truly in contrast to the figures the government is listing and to what you are refuting. Empirical evidence has merit David. In terms of my budgetary situation, inflation is not rising 2%.”
    If you want to calculate your own personal CPI, be my guest. But don’t expect me to take it more seriously than the official CPI unless you can show me (or someone competent to assess the statistical issues) that there is something conceptually or statistically wrong with the how it is computed. Which you haven’t done and obviously have no intention of doing. Coming back to your own personal experience, as if you were uniquely representative of 300 million Americans, just won’t cut it, Mark. So why not move on?

    Eric, Perhaps I was not sufficiently clear in my original assertion. I was not commenting on the gold standard or claiming that it was a silly idea. I would say that it is a bad idea in the year 2012 and is unlikely ever to become a good idea ever again. What is silly is Ayn Rand and her pretentious attempt to endow the gold standard with profound objective metaphysical significance. And it is deeply disturbing to me that a man who has a good chance of becoming Vice-President of the United States would find that bit of pretentious silliness his touchstone for thinking about monetary policy.

  40. 41 Frank Restly August 28, 2012 at 1:26 pm

    David,

    A patent / trademark is a contract between the federal government and an entrepeneur / inventor that gives the owner sole legal authority to manufacturer, market, and sell the good or service that is referenced in the patent / trademark application.

    To reach a market clearing price in a deflationary environment one of a couple things have to happen:

    1. The liquidity preference of the purchasing public must change – demand must increase to match supply
    2. The cost of financing production (cost of capital) must fall to match the fall in prices – nominal interest rates on debt contracts are limited to zero lower bound
    3. The cost of labor must fall to match the fall in prices – unionized labor has wage contracts in nominal terms
    4. The monopolistic price that a entrepeneur receives for his goods / services must change – that price is in part protected by the legal contracts of patent and trademark law

    From your previous – “In the context of the situation in 1933, abrogation of those gold clauses was an act of the highest statesmanship, though I think less extreme measures might have accomplished the same objective.”

    If abrogating gold clauses was an act of the “highest statesmanship” then why isn’t patent revocation a similar act? If as you say “bad policy was preferable to the catastrophe that was then playing itself out” then why hold back on the bad policy? Throw out the labor contracts, throw out the patents, reneg on the debt at your leisure, and let free market laissez faire capitalism reign without government interference.

    Or maybe some elected public official could actually come up with good policy once in a while.

  41. 42 David Glasner August 31, 2012 at 8:37 am

    Frank, Sorry, I just don’t see the connection. Gold clauses had to abrogated to relieve the unconscionable burden on debtors imposed by debts contracted in dollars but with gold clauses attached. You couldn’t just raise the price level to relieve the burden on debtors. Just because one specific type of contract was abrogated to achieve the objective of relieving an unconscionable burden on debtors, doesn’t require that every contract had to abrogated.

  42. 43 Frank Restly August 31, 2012 at 9:00 am

    “Frank, Sorry, I just don’t see the connection. Gold clauses had to abrogated to relieve the unconscionable burden on debtors imposed by debts contracted in dollars but with gold clauses attached.”

    You don’t see the connection because you can’t think of any other way to lower the cost of debt, which is why you use the phrase “had to be abrogated”.

    “Just because one specific type of contract was abrogated to achieve the objective of relieving an unconscionable burden on debtors, doesn’t require that every contract had to abrogated.”

    Again you don’t see how revoking patents can relieve the burden of debt.

  43. 44 Frank Restly August 31, 2012 at 9:38 am

    David,

    The prices involved in production are capital, labor, material, and invention / marketing / brand name saturation. If one cost is high (debt in real terms), then for a producer to remain in business, another cost must go down.

    Those costs can be contractually protected (wage contracts, debt, and patents / trademarks). Any one of those contracts could be abrogated and it is conceivable that the producer despite facing a high real cost of debt, is still able to service that debt by lowering other costs – gold standard or no gold standard.

  44. 45 Frank Restly August 31, 2012 at 11:50 am

    David,

    The biggest problem with your analysis is that you cannot establish cause and effect.

    The gold standard did not cause the deflation of the 1930’s. Deflation is caused by increased productivity – producing more than what is consumed, supply exceeds demand.

    And so your emphasis on gold contracts is misplaced. Instead you need to look at contracts related to production and consumption (wage contracts, debt contracts in interest rate terms, and patent / trademark contracts).

    Paul Krugman, has an excellent article that debunks the myth that returning to the gold standard will return the country to price stability or that a gold standard causes deflation.

  45. 46 David Glasner September 3, 2012 at 11:52 am

    Frank, You seem to be saying that a high debt burden can be sustained if you eliminate other contractually predetermined payments that debtors must make. OK, I grant that, but if the debt burden has increased because of deflation, the straightforward solution to that problem is to do something about deflation, which is what FDR was try to do. There was just one problem, the gold clauses got in the way, so they were abrogated. That is pretty straightforward. Doing something about patents, which I conjecture would have a trivial effect compared to eliminating the gold clause, seems kind of far-fetched to me. On deflation, we are just in total disagreement, and I see little chance that either of us will persuade the other. Do you have a link for the Krugman article that you are referring to?

  46. 47 Frank Restly September 3, 2012 at 3:50 pm

    David,

    “I grant that, but if the debt burden has increased because of deflation, the straightforward solution to that problem is to do something about deflation, which is what FDR was try to do.”

    The straight forward thing for the federal government to do is to.

    1. Shift the debt burden from the private sector to the public sector via the federal government borrowing money and paying people to perform public service work (a lot of the New Deal programs focused on this)
    Reason: Deflation does not cause the federal government to go bankrupt like it can in the private sector and the reason is simple. Federal debt is a claim on future tax revenue that is legally mandated rather than the subject of consumer and producer choices

    2. Lower the cost of debt service through tax policy.

    “Frank, You seem to be saying that a high debt burden can be sustained if you eliminate other contractually predetermined payments that debtors must make. OK, I grant that, but if the debt burden has increased because of deflation, the straightforward solution to that problem is to do something about deflation, which is what FDR was try to do.”

    In essence yes that is what I am saying, although heavy handed abrogation could just as easily be replaced with gentlemanly renegotiation. For instance creditors could accept equity in lieu of their bonds in the case of corporate debt restructuring.

    Deflation is an indication that production exceeds demand. Why is this necessarily a bad thing? To say that FDR had to “do something” about deflation belies a basic misunderstanding of macroeconomics and the role of government. FDR did not have to “do” anything about deflation. The only thing he needed to do was to provide an avenue for borrowers to make timely payments to their creditors. This could be accomplished through debt transfer (private to public sector), debt to equity conversion, or tax policy. Abrogation was a knee jerk reaction by a politician looking to be re-elected instead of smart economic policy.

    One of those predetermined payments that can be lessened is taxes. The federal government can lower the after tax cost of debt service in the private sector below zero by selling a tax break with a rate of return and a duration where that rate of return exceeds the real cost of private borrowing. This not only lowers the cost of debt service in the private sector, but it also does it in such a way that no additional federal debt is incurred. In essence the federal government sells equity claims on its future tax revenue.

    One final note on gold clauses – they are legal today. FDR outlawed them in 1933 with executive order 6102. They were re-legalized in 1977.

    From the wikipedia articles on gold clauses and Executive Order 6102:

    “However, Act of Oct. 28, 1977, Pub. L. No. 95-147, § 4(c), 91 Stat. 1227, 1229 (originally codified at 31 U.S.C. § 463 note, recodified as amended at 31 U.S.C. § 5118(d)(2)) amended the 1933 Joint Resolution and made it clear that parties could again include so-called gold clauses in contracts formed after 1977″

    “On August 27, 2008, the United States Court of Appeals for the Sixth Circuit affirmed the enforceability of such clauses in the decision Jamaica Avenue, LLC vs S&R Playhouse Realty Co..[2]”

    The Paul Krugman article is here:

    http://krugman.blogs.nytimes.com/2012/08/26/golden-instability/

    This compares the consumer price index with the price of gold and concludes that gold like every other traded items goes through manias. Hence there is no relationship between gold and stable, rising, or falling prices. A gold standard does not maintain stable prices and it certainly does not cause deflation.

  47. 48 David Glasner September 4, 2012 at 5:22 pm

    Frank, No if the debt burden is being increased by an unforeseen deflation, the straightforward solution is to stop the deflation and restore the old price level. Creditors were paid back, they just weren’t entitled to paid back in terms of gold (which had appreciated by 50% in three years) rather than in terms of dollars.

    Deflation may be an indication of increased productivity, but increasing productivity was not causing falling prices in the Great Depression. When has productivity ever increased at a rate of 15% a year in any advanced country? The deflation was the result of an increasing demand for gold causing the value of gold to rise which, under a gold standard in which the nominal price of gold is held constant because that is the definition of a gold standard, means that the prices of other stuff is falling at a rate of 15% a year.

    Do you have any idea how many contracts debt contract are now being made with gold clauses. I don’t, but would be shocked if even 0.001% of contracts now entered into in the US included gold clauses. In 1933 they were routine.

    Inflation under a fiat standard is not correlated with the value of gold. Under a gold standard in which the nominal value of gold is fixed an increase in the value of gold, whatever the cause, is identical with falling prices for everything else. Krugman does not disagree with that.

  48. 49 Frank Restly September 4, 2012 at 8:13 pm

    David,

    “Frank, No if the debt burden is being increased by an unforeseen deflation, the straightforward solution is to stop the deflation and restore the old price level.”

    First, the extent of the deflation may have been unforeseen, but deflation itself was not unusual at all.

    http://research.stlouisfed.org/fred2/graph/fredgraph.pdf?&chart_type=line&graph_id=&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23b3cde7&graph_bgcolor=%23ffffff&txtcolor=%23000000&ts=8&preserve_ratio=true&fo=ve&id=CPIAUCNS&transformation=pc1&scale=Left&range=Custom&cosd=1913-01-01&coed=2012-07-01&line_color=%230000ff&link_values=&mark_type=NONE&mw=4&line_style=Solid&lw=1&vintage_date=2012-09-04&revision_date=2012-09-04&mma=0&nd=&ost=&oet=&fml=a&fq=Monthly&fam=avg&fgst=lin

    Deflationary periods in the United States – A couple of months in 1914, 1921-1923, 1930-1934,1938-mid 1939, and 1949-mid 1950. To say that deflation is an unforeseen economic outcome reflects a total misunderstanding of market economies.

    Second, there is nothing straightforward about the federal government setting prices on anything but money (see Nixon wage and price controls). Of course that is what Roosevelt did, he changed the cost of money by changing the relative price of the dollar with respect to gold.

    “When has productivity ever increased at a rate of 15% a year in any advanced country?”

    I never said that productivity rose 15% a year. I said that when an economy produces more than it consumes, deflation is a likely outcome and this is not a bad thing that must be rectified by contract abrogation. I don’t have a credit history of the United States before 1949 to determine if productivity increased at 15% annualized through the Great Depression, and so I cannot determine at what rate productivity was growing through the Depression.

    Mind you, productivity can increase even while economic growth shrinks if the credit contraction is severe enough. For instance you could have -1% annualized real growth while credit contracts 15% annualized. In that case you have a large productivity increase but a shrinking economy.

    “Under a gold standard in which the nominal value of gold is fixed an increase in the value of gold, whatever the cause, is identical with falling prices for everything else.”

    No, under a gold standard in which the dollar cost of gold is fixed, an increase in the value of gold relative to all other goods either corresponds either with a decrease in the supply of gold or an increase in the the supply of all other goods. Hence the value of gold rises with respect to all other goods.

  49. 50 David Glasner September 5, 2012 at 7:19 pm

    Frank, There were two other severe deflations in the 20th century. 1920-21 and 1937-38. The 1920-21 deflation was sharper, but it only lasted for a little more than a year, so the cumulative price level drop was not nearly as great as in 1929-33. The 1937-38 deflation was very severe, but neither as sharp nor as long-lasting the 1929-33 deflation. The 1949-50 deflation was trivial in comparison with the other three episodes.

    You said:

    “No, under a gold standard in which the dollar cost of gold is fixed, an increase in the value of gold relative to all other goods either corresponds either with a decrease in the supply of gold or an increase in the the supply of all other goods. Hence the value of gold rises with respect to all other goods.”

    The proposition I was asserting was that under a gold standard an increase in the value of gold has to mean that an ounce of gold can be exchanged for increased amounts of all other goods. Thus, if prices are quoted in dollars and the price of an ounce of gold is fixed in dollar terms, the prices of all other goods in dollar terms must have fallen. It is irrelevant whether this is because there is a decreased supply of gold or an increase in the supply of all other goods. So I have no idea what it is that I said that you could possibly be disagreeing with. My statement about the meaning of an increase in the value of gold under a gold standard does not depend on the cause of the increase in value of gold. In addition, an increase in the value of gold can also occur with no change in the supply of gold, if the demand for gold increases, which is what happened in 1929-33.

  50. 51 Frank Restly September 6, 2012 at 8:36 am

    David,

    “Thus, if prices are quoted in dollars and the price of an ounce of gold is fixed in dollar terms, the prices of all other goods in dollar terms must have fallen. It is irrelevant whether this is because there is a decreased supply of gold or an increase in the supply of all other goods.”

    For the federal government to formulate a proper policy response, the cause of the increase in value of gold relative to all other goods is very relevant.

    If the value of gold is increasing relative to all other goods because the supply of all other goods exceeds the demand for all other goods – one policy response is required – either lower the cost of capital for producers to match the fall in prices (supply side tax policy) or have the federal government spend money (Keynesian demand side policy).

    If the value of gold is increasing relative to all other goods because the demand for gold exceeds the supply of gold, then another policy response is required – do nothing if monetary and fiscal policy are not linked to gold, or delink monetary and fiscal policy from gold.

    Remember that while the relative prices of gold and dollars are fixed, their supply and demand characterics are not equivalent. Gold may be sought after for reasons other than as a means of exchange.

    You and I are not in disagreement over the cause of the Great Depression – debt deflation. You and I are in disagreement over the remedy

  51. 52 Frank Restly September 6, 2012 at 3:35 pm

    “In addition, an increase in the value of gold can also occur with no change in the supply of gold, if the demand for gold increases, which is what happened in 1929-33.”

    An increase in the value of gold relative to what? Other goods?

    How do you know that the demand for gold increased between 1929-1933? You know that the relative price of gold to other goods rose, but that is not direct evidence that the demand for gold increased. Hence, the only thing you know is that transaction curve for gold was to the right of the transaction curve for other goods.

    Price of good
    ^
    | | – Other Goods | – Gold
    | | |
    | | |
    | \ \
    | \ \
    | \ \
    | \ \
    | \ \
    | \ \
    | \ \
    |————————————–> Quantity of good sold

    These curves reflect a preference for gold above other goods which explains the price premium for gold above other goods, but they tell us nothing about the supply and demand for either gold or other goods.

    For that you need to compare the aggregate supply / aggregate demand curves for both gold and other goods.

  52. 53 Frank Restly September 6, 2012 at 3:40 pm

    David,

    I had a graph showing two side by side curves (using spaces to delineate between the two). Unfortunately, the spaces got deleted out of the posting. Picture two transaction curves – one for gold and one for other goods with the gold curve to the right of the goods curve.

  53. 54 David Glasner September 7, 2012 at 9:32 am

    Frank, You said:

    “For the federal government to formulate a proper policy response, the cause of the increase in value of gold relative to all other goods is very relevant.”

    I agree. My previous comment was explaining what constitutes an increase in the value of gold under a gold standard not what causes it. Whatever the cause, an increase in the value of gold under a gold standard is constituted by falling prices for all non-gold goods.

    “You and I are not in disagreement over the cause of the Great Depression – debt deflation. You and I are in disagreement over the remedy.”

    Not necessarily. Debt deflation didn’t just happen in 1929. It was caused by an increase in the monetary demand for gold by the world’s central banks, most notoriously by the insane Bank of France.

    “An increase in the value of gold relative to what? Other goods?

    “How do you know that the demand for gold increased between 1929-1933?
    You know that the relative price of gold to other goods rose, but that is not direct evidence that the demand for gold increased. Hence, the only thing you know is that transaction curve for gold was to the right of the transaction curve for other goods.”

    With the price of gold fixed in dollar terms, an increase in the value of gold could not have occurred unless the prices of other goods were falling. The gold holdings of the Bank of France increased by about 300% percent from 1927 to 1931. For a couple of years, the Fed was tolerating an outflow of gold to accommodate the French demand but in 1929, the Fed began accumulating gold as well. That’s when deflation set in.

  54. 55 Frank Restly September 7, 2012 at 10:15 am

    “With the price of gold fixed in dollar terms, an increase in the value of gold could not have occurred unless the prices of other goods were falling.”

    The prices of other goods were not falling because of an increase in the central bank demand for gold. Think of it this way, the central bank does not go around buying and selling houses, or wheat, or any other manufactured good or commodity. And so the central bank cannot alter the relative price of gold with respect to any of those goods. Only the public can do that either by giving preference to one form of currency over the other or other goods relative to currency.

    “The gold holdings of the Bank of France increased by about 300% percent from 1927 to 1931. For a couple of years, the Fed was tolerating an outflow of gold to accommodate the French demand but in 1929, the Fed began accumulating gold as well. That’s when deflation set in.”

    When the Fed accumulates gold they just don’t just go around with guns taking it from everyone. They bought it using Federal Reserve Notes which became legal tender under the first Federal Reserve Act. Presumably the French Central Bank was doing the same thing using French bank notes. And so both central banks were swapping one form of currency (bank notes) for another (gold). This will have no effect on the relative cost of goods with respect to gold unless bank notes and gold have different supply / demand curves. Meaning, private holders of those two forms of currency treat them differently – spend the banknotes, hold the gold.

    Because the price of gold in dollar bank notes is fixed you know where those two curves intersect ( supply / demand for banknotes , supply / demand for gold ) but you do not know what those curves look like away from that point of intersection.

    Think of it this way – suppose people back then had equal faith in both bank notes and gold maintaining purchasing power (strange as that may sound) – Would FDR’s devaluation of the dollar in gold terms had any effect at all? True it would have increased the money supply, but it would not have changed the liquidity preference of the currency holding public (See Irving Fisher on money illusion).

    What FDR was trying to do was change the liquidity preference of the gold holding public, that was what he thought was causing the deflation – not enough spending relative to the supply of goods. He chose heavy handed contract abrogation to achieve his goals, when either supply side tax policy or Keynsian spending would have sufficed.

  55. 56 Frank Restly September 7, 2012 at 2:22 pm

    “Debt deflation didn’t just happen in 1929. It was caused by an increase in the monetary demand for gold by the world’s central banks, most notoriously by the insane Bank of France.”

    Wrong. Just flat out wrong.

    For the central bank to affect the price of gold versus other goods it must be active in both markets – gold and other goods. If the central bank buys gold but does not sell any other goods, all that it has done is a currency exchange – dollars for gold without affecting the price of anything else.

  56. 57 Frank Restly September 8, 2012 at 7:35 am

    It has been suggested that the stock market crash of 1929 and the leveraged (debt financed) positions that it wiped out changed the psyche of the American people. Psychological changes in attitudes toward debt and capital markets are impossible to measure directly, but they are not without merit.

    And so your comment that debt deflation didn’t just happen in 1929, reflects a misunderstanding of the significance of the crash. Confidence does have an important place to play in capitalism.

    As far as American monetary policy goes, Fed Chairman Benjamin Strong died in 1928 several months prior to the crash and was replaced by George L. Harrison. While I cannot comment directly on the significance of this, I will say that confidence is built on leadership and weak leadership weakens confidence.

  57. 58 David Glasner September 9, 2012 at 6:43 pm

    Frank, You said:

    “The prices of other goods were not falling because of an increase in the central bank demand for gold. Think of it this way, the central bank does not go around buying and selling houses, or wheat, or any other manufactured good or commodity. And so the central bank cannot alter the relative price of gold with respect to any of those goods. Only the public can do that either by giving preference to one form of currency over the other or other goods relative to currency.”

    By accumulating gold, central banks were absorbing gold that had been held in the private sector. If there was relatively less gold available for real uses, the real value of gold had to rise. The value of gold is equalized in all uses, real or monetary, an increase in the monetary demand for gold must raise the value of gold in real uses as well.

    “What FDR was trying to do was change the liquidity preference of the gold holding public, that was what he thought was causing the deflation – not enough spending relative to the supply of goods. He chose heavy handed contract abrogation to achieve his goals, when either supply side tax policy or Keynsian spending would have sufficed.”

    FDR’s gold policy was staggeringly successful and would have ended the Great Depression before the end of his first term had he not allowed himself to be sidetracked by imposing the National Recovery Administration which slowed the recovery down to a crawl after the fastest four-month expansion in US history.

    I do agree with you that confidence was a problem in 1929, and the departure of Benjamin Strong, several months before his death, was certainly a blow to the world economy. But the accumulation of gold by central banks was still central to the deflationary process that got started in the summer of 1929.

  58. 59 Frank Restly September 10, 2012 at 6:26 am

    “By accumulating gold, central banks were absorbing gold that had been held in the private sector.”

    But Central Banks were not going around with guns and just taking the gold from people. They were buying up gold with bank notes (using either U. S. federal reserve notes or the French equivalent). And so this has no effect on the price of gold with respect to other goods.

    “If there was relatively less gold available for real uses, the real value of gold had to rise.”

    Excuse me? The real value of gold is the value of gold relative to all other goods – at least that was what I thought we were talking about. It has nothing to do with the “real use” of gold.

    “The value of gold is equalized in all uses, real or monetary, an increase in the monetary demand for gold must raise the value of gold in real uses as well.”

    Your claim was that the monetary demand for gold raised the value of gold relative to all other goods thus causing deflation, NOT that it changed the value of gold in real uses (jewelery?).

    “But the accumulation of gold by central banks was still central to the deflationary process that got started in the summer of 1929.”

    We must agree to disagree. The central bank is not active in the markets for other goods and as such cannot affect the relative price of gold versus other goods – I don’t know how else to put this.

  59. 60 David Glasner September 12, 2012 at 7:28 pm

    Frank, You said:

    “Central Banks were not going around with guns and just taking the gold from people. They were buying up gold with bank notes (using either U. S. federal reserve notes or the French equivalent). And so this has no effect on the price of gold with respect to other goods.”

    Actually it would be more accurate to say that people were selling their gold to the central banks in order to obtain bank notes because the central banks were not issuing as many bank notes as the public wanted to hold, so they used gold, which central banks were obligated to exchange for gold at a fixed rate, to obtain more bank notes. But having parted with some of their gold to obtain the bank notes, there was less gold available for all the non-monetary uses that the non-bank public was putting all that gold to. With less gold available to the non-bank public, the value of gold relative to other goods used by the non-bank public had to increase, which meant that the money prices of all those other goods had to fall.

    “The central bank is not active in the markets for other goods and as such cannot affect the relative price of gold versus other goods.”

    That’s why I pointed out how the accumulation of gold by central banks implied a withdrawal of gold from the holdings of the non-bank public. That’s how the actions of the central bank affected the relative price of gold versus other goods.

  60. 61 Frank Restly September 12, 2012 at 11:01 pm

    David,

    “Actually it would be more accurate to say that people were selling their gold to the central banks in order to obtain bank notes because the central banks were not issuing as many bank notes as the public wanted to hold, so they used gold, which central banks were obligated to exchange for gold at a fixed rate, to obtain more bank notes.”

    Banks don’t issue bank notes, they either exchange them for gold at a fixed exchange rate or lend them out at a rate of interest.

    “With less gold available to the non-bank public, the value of gold relative to other goods used by the non-bank public had to increase, which meant that the money prices of all those other goods had to fall.”

    No, the money prices of all those other goods did not have to fall because the amount of money in circulation does not change when the central bank swaps bank notes for gold.

    Instead what you might say is that because debt during the early 20th century was primarily held within the banking system, the payments on that debt represent a constant pull of banknotes out of circulation. That works fine as long as credit expands (new loans are made). When credit contracts, however, new bank loan origination crawls to a stop, and the interest payments on existing debt slowly pull banknotes out of circulation. That with drawl of banknotes out of circulation reduces the total amount of money in circulation cause prices of other goods to fall relative to the amount of money (banknotes + gold) in circulation. That process can be exacerbated by a change in the liquidity preference of the public – for instance a stock market crash causes a lot of people to become more cautious, holding more money and spending less of it out of fear.

    Because of the nature of fractional reserve lending, the total amount of loans that can be created is limited by the amount of base money (gold) that is held within the banking system. And so what you might also say is that the central banks (U. S. and French) were buying gold to increase their base money upon which their member banks are able to loan against.

    Recognize, that is a lot different than today because most loans originated by the banking system are not retained within the banking system. They are sold off to other parties (pension funds, insurance companies, government sponsored enterprises, individual investors, etc.). And so the interest income is not retained within the banking system but instead is shared by the populace.

    The democratic ownership of credit instruments has its positives and negatives. The obvious positive being that it shares the interest payments on debt throughout the economic system. The negative being that without strong regulation that requires due diligence in loan origination, credit quality suffers (see subprime lending).

  61. 62 Frank Restly September 12, 2012 at 11:58 pm

    “With less gold available to the non-bank public, the value of gold relative to other goods used by the non-bank public had to increase, which meant that the money prices of all those other goods had to fall.”

    In a fixed exchange rate (gold for banknotes), the total amount of money (gold + banknotes) does not change when a bank swaps one for the other nor does the value of that money relative to other goods change.

    Do the math. Suppose the amount of banknotes in circulation is $10 billion and the amount of gold in circulation is 100 million ounces at a fixed exchange rate of $20 per ounce. The total amount of money in circulation is $10 billion + 100 million * $20 = $12 billion. Suppose that the nominal value of goods produced in a year is also $12 billion, meaning that the price level (value of goods / total money in circulation) is $1 per good.

    Now suppose the central bank swaps $500 million in banknotes for 25 million ounces of gold. The total amount of banknotes in circulation increases to $10.5 billion while the amount of gold falls to 75 million ounces still at a fixed exchange rate of $20 per ounce. The total amount of money in circulation is $10.5 billion + 75 million * $20 is still $12 billion and thus the price level (value of goods / total money in circulation) is still $1 per good – no deflation.

    What you seem to be arguing is that because 25 million ounces of gold are pulled from circulation, the value of goods with respect to gold changes, thus causing deflation. But the price level is not measured in ounces of gold per good simply because gold is not the only medium of exchange being used. Assuming a fixed money velocity, you measure the price level as the nominal value of goods / the TOTAL amount of money in circulation (gold + banknotes).

  62. 63 David Glasner September 14, 2012 at 10:00 am

    Frank, My use of the term “issue” was not inconsistent with your point that a bank does not simply pass out free cash. The term “bank of issue” is well established, and the Bank of England at least at one time, had a separate “issue department” and separate “banking department.”

    You said:

    “In a fixed exchange rate (gold for banknotes), the total amount of money (gold + banknotes) does not change when a bank swaps one for the other nor does the value of that money relative to other goods change.”

    Obviously the total amount of gold doesn’t change when a central bank acquires additional gold. That is a given. But it’s distribution across alternative uses for gold may very well change. Central banks were increasing their demand for gold, absorbing gold formerly held in the private sector and formerly being put to non-monetary uses. It was the withdrawal of gold from non-monetary uses as it was being absorbed by the central banks that was altering the value of gold relative to all other goods that forced the price adjustment, which under a gold standard with a fixed money price of gold, meant falling prices for all non-gold goods and services. There is gold in circulation (gold coins) and there is also gold held in bullion form (mostly in central banks, but also in some private hoards) and there is gold in all sorts of non-monetary uses like jewelry, decoration, teeth fillings, and a few industrial applications. Central banks were absorbing non-coined gold out of private hoards, jewelry, probably very few teeth, but perhaps encouraging people to use silver for new fillings instead of gold, and fro some industrial applications.

  63. 64 Frank Restly September 14, 2012 at 3:01 pm

    David,

    You said,

    “It was the withdrawal of gold from non-monetary uses as it was being absorbed by the central banks that was altering the value of gold relative to all other goods”

    What difference does it make whether the gold the central bank was buying was monetary (coins) or non-monetary (jewelry) when it comes to affecting the price of other goods? That is like saying that if a private individual took a bunch of gold coins, melted them down, and made tooth fillings out of them, then the price of cattle in Oklahoma would crash. Are we talking quantum physics and Einstein’s spooky stuff here?

    “Obviously the total amount of gold doesn’t change when a central bank acquires additional gold.”

    I didn’t say the total amount of gold doesn’t change. I said the total amount of money (gold + banknotes) circulating through the public does not change when the central bank swaps one for the other. And because the total amount of money available to purchase goods does not change, the price level will not change if money velocity is stable.

    “But it’s distribution across alternative uses for gold may very well change.”

    Gold is a malleable metal. It can be ground into dust, melted into coins, and basically made into any shape you desire. And so your conclusion that the central bank changed the distribution of the use of gold has a major fallacy – the private sector determines what that use is. If someone wants gold jewelry but has gold coins, he melts them down and makes jewelry.

    All the central bank does it determine the ratio of banknotes to gold that circulate within the public.

    With a stable money velocity and a stable money supply, there can be no deflation.

  64. 65 Taz von Gleichen October 7, 2012 at 10:29 am

    I wonder if Mitt Romney was doing this to attract supporters from Ryan Paul. Since he has a huge fan base. Which is something that Romney needs to win the campaign. At lease I like the fact that Ayn Rand is being mentioned by a politician.


  1. 1 Browsing Catharsis – 08.16.12 « Increasing Marginal Utility Trackback on August 16, 2012 at 5:02 am

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About Me

David Glasner
Washington, DC

I am an economist at the Federal Trade Commission. Nothing that you read on this blog necessarily reflects the views of the FTC or the individual commissioners. Although I work at the FTC as an antitrust economist, most of my research and writing has been on monetary economics and policy and the history of monetary theory. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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